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Startup Lawyers London: Why Do You Need To Get Startup Legal Advice?

Davide Palazzo

January 13, 2020

Starting Your Own Business: Key Legal Considerations for Startups

You have finally decided to start your own business. You have – almost – everything in place: a brilliant (“unbeatable”) idea, some smart co-founders to share your journey with, and an ambitious business plan. However, concerns about liquidity, retaining significant ownership, or maintaining control over the company may weigh on your mind. These concerns are common and understandable. Ownership is often a key motivation for starting or joining a new business. That’s why it is essential to plan your business’s ownership structure thoughtfully from the very beginning.

Dividing founders’ equity, setting vesting terms, allocating equity to employees, and establishing a decision-making protocol are crucial steps. A startup lawyer can help address these tricky questions at the right time, ensuring you create an efficient and flexible capitalization structure from the outset.

In this article, we will focus on critical aspects of startup ownership, including allocating founders’ equity, identifying founders, protecting founders in case of termination, and planning for future investors or employees.

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Identifying Founders: The First Step

Who qualifies as a founder? While it might seem straightforward, many startups struggle with this question. Excitement, fear of excluding someone, or underestimating the importance of this decision can lead to designating too many people as founders.

However, this distinction is vital. Founders’ stock often enjoys unique privileges compared to options, investors, and other shareholders. Limiting founder status to those who bring significant value to the company is critical. For other team members, consider alternative incentives like stock option plans.

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Dividing Founders’ Equity

To divide founders’ equity effectively, a startup equity calculator can be a useful tool, especially for those new to the process. Start by asking yourself these questions:

- Who is the CEO?

- Who had the original idea?

- Who is coding most of the app?

- Who is responsible for marketing?

- Who is writing web content?

- Which founders are full-time?

- Who pitches to investors?

Based on your answers, you can divide equity in a way that reflects each person’s contributions. A startup lawyer can provide valuable guidance in this process.

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Stock Option Plans for Employees

Creating an equity incentive plan early on is a smart decision to avoid piecemeal dilution later. In high-tech industries, experienced employees often expect equity as part of their compensation. Founders may also use equity to attract talent from large corporations or offer it in lieu of salaries, especially when funds are limited.

**Example:** A startup values its stock at £1 per share, setting the exercise price accordingly. John, an employee, contributes £100 and is issued 100 shares. He doesn’t pay now but retains the option to exercise his rights within 10 years, potentially benefiting from future appreciation in stock value. Alternatively, he can choose not to exercise his rights.

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Protecting Founders in Case of Termination: The Role of Vesting

Why consider protection measures for termination when everything seems perfect? Even the strongest founder teams can face disagreements, and most startups encounter challenges in their first year.

Discussing vesting terms early on is crucial, even if team members initially prefer outright ownership of their shares. Below are the main types of vesting:

Time-Based Vesting

Stock is released in equal amounts each month over a specified period.

**Example:** If shares vest monthly over three years, and John leaves after 18 months, he retains only half of his original shares. The remaining half can be repurchased by the company at par value.

#### Cliff Vesting

No vesting occurs during a defined initial period (e.g., two years). After this period, a specific portion vests, with the remainder vesting gradually over time.

**Example:** John’s stock vests over four years with a two-year cliff. If he leaves after one year, he retains no shares. If he leaves after three years, two-thirds of his shares will have vested.

Milestone-Based Vesting

Shares vest upon achieving specific milestones, such as securing £2 million in funding or hitting a revenue target.

Combined Approach

This approach blends milestone-based and time-based vesting for greater flexibility.

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Planning for the Future

Building a solid legal foundation from the outset ensures your business is prepared for future challenges and opportunities. A startup lawyer can help structure agreements to protect founders and accommodate growth, whether through employee equity plans or preparing for investors.

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Contact Startup Lawyers in London

Do you need tailored legal advice for your startup? Our team of startup lawyers in London offers flexible fee arrangements and innovative solutions. We act as an extension of your legal team, providing clear, bespoke, and commercially oriented advice.

Whatever stage your company is in, we can help. Contact us today, and we’ll be in touch within 48 hours.

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Disclaimer: This article is for general informational purposes only and does not constitute legal or professional advice. For specific legal concerns, please consult a qualified lawyer.

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